OREANDA-NEWS. Fitch Ratings has downgraded China-based department store operator Parkson Retail Group Limited's (Parkson) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'B' from 'B+'. Fitch has assigned a Negative Outlook to the IDR and a Recovery Rating of 'RR4' to the senior unsecured rating.

The downgrade reflects the continued deterioration in Parkson's core business and its rising leverage. The Negative Outlook reflects the uncertainty over when same-store sales will stabilise.

KEY RATING DRIVERS
Declining Sales and Profitability: Parkson's fundamentals have steadily deteriorated over the past few years due to weaker consumer spending and competition from other retail formats, such as e-commerce and shopping malls. Same-store sales declined 8% in 2015 while gross sales proceeds fell by 6.9%. The full-year numbers also suggest that core operations further deteriorated in 2H15. Parkson's heavy reliance on rented properties has exacerbated the impact of the sales decline on margins. EBITDA has fallen to 2%-3% of gross sales proceeds, compared with EBITDA margins in the low teens for many department store operators rated by Fitch.

High Leverage: Parkson's leverage has risen in the past few years and it has moved into a net debt position on an accounting basis. Parkson's operating lease expenses are high compared to its peers, which adds to its financial burden. Fitch expects payables-adjusted FFO net leverage to reach 6.9x in 2016 and continue rising. At the same time, coverage ratios are also deteriorating - Fitch expects FFO fixed-charge coverage to fall to 1.2x for 2016 and 2017.

Share Buybacks, Dividends Continue: Parkson has been repurchasing shares through the Hong Kong Stock Exchange since 2013. So far the company has bought back around 5% of total shares outstanding using cash. It spent CNY65.5m on share buybacks in 2015 and a further CNY11m in January 2016. In addition to share buybacks, the company has also declared a final dividend after the 2015 results despite reporting a net loss.

Near-Term Liquidity Sufficient: Parkson had CNY3bn of cash, term deposits and principal guaranteed investments at end-December 2015. Liquidity is not a concern for the next 12 months as current debt is only CNY644m. Parkson's 4.5% USD500m (CNY3.2bn) bonds will mature in May 2018. Fitch believes the company could face difficulties refinancing the bonds if operations do not improve in the next 12-18 months.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Low single-digit decline in gross sales proceeds and revenues
- EBITDA margin of 8%-9%
- Capex of CNY500m per year for 2016-18

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Same-store sales decline stabilises or same-store sales turn to growth on a sustained basis

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO fixed-charge coverage at less than 1.2x on a sustained basis
- Payables adjusted (adjusted net debt plus 85% trade payables and customer deposits) FFO net leverage sustained above 7x
- Continued deterioration in same-store sales and margins.